When the “99%” Are Left Behind

Earlier this week we discussed the head of the world’s biggest hedge fund, Bridgewater’s Ray Dalio talking to the cycles and patterns of financial markets as we mark the 10th year anniversary of the collapse of Lehman Brothers.  Dalio has been quite vocal this last week as he releases his free book Big Debt Crises.  For a Wall St heavyweight, Dalio is going somewhere where such types don’t, and that is into the social side of crises.  Such matters of concern for ‘great unwashed’ 99% don’t usually factor into the psyche of the top end of town.  However Dalio fears we are staring down the barrel of large scale social unrest after years of monetary stimulus that has enriched the rich and left the rest behind.  We discussed this last year here.

The following is an excerpt from a live interview he gave on CNBC this week in reference to his previous comparisons of this market to that of the 1937 crash following the Great Depression:

  • Debt Limits Reached at Bubble Top, Causing the Economy and Markets to Peak (1929 & 2007)
  • Interest Rates Hit Zero amid Depression  (1932 & 2008)
  • Money Printing Starts, Kicking off a Beautiful Deleveraging  (1933 & 2009)
  • The Stock Market and "Risky Assets" Rally  (1933-1936 & 2009-2017)
  • The Economy Improves during a Cyclical Recovery  (1933-1936 & 2009-2017)
  • The Central Bank Tightens a Bit, Resulting in a Self-Reinforcing Downturn (1937)

“Because I think the parallels are really important to understand. Okay. 1929 to ’32 and 2008 to 2009, we have a debt crisis. And interest rates hit zero. Both of those cases, interest rates hit zero. Only two times this century. There’s only one thing to do next. And that is to print money and buy financial assets. So in both of those cases, that’s what the central bank did, and they pushed asset prices up. As a result we had an expansion, we had the markets rising. And we particularly had an increase in the wealth gap. Because if you owned financial assets, you got richer. And if you didn’t, you didn’t. And so what today we have is a wealth gap that’s the largest since that period. The top 0.1 of the 1% of the population’s net worth is equal to the bottom 90% combined. You have to go back to 1935-40. As a result we have populism, okay. Populism is the disenchanted – capitalism not working for the majority of people. So we have that particular gap. So we have a political gap, a social gap in terms of the economics, and we’re coming into the phase where we’re beginning the tightening cycle. 1937, we begin a tightening cycle. We begin a tightening cycle at this point. No tightening cycle ever works out perfectly. That’s why we have recessions. We can’t get it perfectly. So as we’re going into this particular cycle, we have to start to think, "well, what will the next downturn be like?” we’re nine years into this. As you have a downturn, I believe that there’s a political and social implication to that related to populism. And less effective monetary policy. There’s less effective monetary policy because so far there are two types of monetary policy used: lowering interest rates, we can’t lower interest rates, and the second is quantitative easing. And it’s maximized its effect. So I think the next downturn is going to be a different type of downturn. I think pension problems, health care problems in terms of obligations that are not funded that are not debt –“

When asked about the severity of the next crash:

“I think it’ll be more severe in terms of the social/political problems. And I think it will be more difficult to handle”

Dalio’s points are salient reminders of consequences.  We discussed last week that the Fed has no more bullets when we see another crash.  Dalio raises the other issue of all the unfunded liabilities the US has as well that will be laid bare in a major crash.  If you are unaware of this you need to read our last article on it here.  It is well documented that many US Pension funds too are horribly underfunded too.  Dalio makes the point that at the very time that we have a disenfranchised social order creating populist ‘solutions’ such as Brexit, Trump, and the various far right victories in Europe; the next crash could see many hung out to dry and the ensuing disorder could be very serious indeed.  Flippant views that the Fed will just do QE4 on the next crash don’t take into account how the broader public will react to such moves.

Is it any wonder Dalio famously said:

“If you don’t own gold there is no sensible reason other than you don’t know history or you don’t know the economics of it”